1. Trends, Challenges and Opportunities in P/C Insurance Focus on Mississippi Markets MSU Insurance-Day Starkville, MS April 6, 2016 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: 212.346.5540  Cell: 917.494.5945  stevenw@iii.org  www.iii.org

2. 2 Insurance Industry: Financial Update & Outlook 2015 Was a Reasonably Good Year 2016: A Repeat of 2015? 12/01/09 - 9pm 2

3. eSlide – P6466 – The Financial Crisis and the Future of the P/C 3 Net Premium Growth: Annual Change, 1971—2016F (Percent) 1975-781984-872000-03 Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute. Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3- Year Decline Since 1930-33. 2015-16F: 4.0% 2014E: 4.1% 2013: 4.6% 2012: +4.3%

4. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 4 P/C Insurance Industry Combined Ratio, 2001–2015:Q3 (Est.)* * Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0. Sources: A.M. Best, ISO. Best Combined Ratio Since 1949 (87.6) Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market Insurers Paid Nearly $1.16 for Every $1 in Earned Premiums Heavy Use of Reinsurance Lowered Net Losses

5. P/C Industry Net Income After Taxes 1991–2015 (Est.) 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS 1 = 3.5% 2012 ROAS 1 = 5.9% 2013 ROAS 1 = 10.2% 2014 ROAS 1 = 8.4% 2015:H1 ROAS = 9.2% ROE figures are GAAP; 1 Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009. Sources: A.M. Best, ISO; Insurance Information Institute. $ Millions

6. Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2016F *Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers. Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning 1977:19.0% 1987:17.3% 1997:11.6% 2006:12.7% 1984: 1.8% 1992: 4.5% 2001: -1.2% 10 Years 9 Years History suggests next ROE peak will be in 2016-2017, but that seems unlikely ROE 1975: 2.4% 2013 9.8% 2014 8.2% 2015F=6.5% 2016F=6.3%

7. 7 Return on Net Worth (RNW) Largest Lines: 2005-2014 Average Source: NAIC; Insurance Information Institute. Commercial lines have tended to be more profitable than personal lines over the past decade Percent

8. 8 RNW All Lines by State, 10-Year (2005-2014) Avg The most profitable states over the past decade are widely distributed geographically Source: NAIC; Insurance Information Institute. Profitability Benchmark: All P/C US: 8.4% Return on Net Worth (%)

9. 9 RNW All Lines by State, 2005-2014 Average: (cont’d) Source: NAIC; Insurance Information Institute. Return on Net Worth (%)

10. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 10 Policyholder Surplus, 2006:Q4–2015:Q3 Sources: ISO, A.M.Best. ($ Billions) 2007:Q3 Pre-Crisis Peak Surplus as of 9/30/15 stood at $663.9B 2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non- insurance business. The industry now has $1 of surplus for every $0.75 of NPW, close to the strongest claims-paying status in its history. Drop due to near-record 2011 CAT losses The P/C insurance industry entered 2016 in very strong financial condition.

11. Advertising Expenditures by P/C Insurance Industry, 1999-2014 Source: Insurance Information Institute from consolidated P/C Annual Statement data, Insurance Expense Exhibit (Part I). $ Billions P/C ad spend hit an all time high of $6.175 billion in 2013, up 1.5% over 2012. P/C ad spending has tripled since 2004 (the end of the last “hard market”). The pace of growth has slowed from 15.8% in 2011 and 23.8% in 2010

12. 12 Historical Analysis of Mississippi P/C Insurance Markets Analysis by Line and Nearby State Comparisons

13. Profitability: Return on Net Worth 12/01/09 - 9pm 13

14. 14 RNW All Lines: MS vs. U.S., 2005-2014 Source: NAIC, Insurance Information Institute Average 2005-2014 US: 6.7% MS: -7.4%

15. 15 RNW All Lines: MS vs. U.S., 2005-2014 Source: NAIC, Insurance Information Institute Average 2005-2014 US: 6.7% MS: -7.4% Mississippi’s all-lines RNW topped the US overall in most years of the last decade

16. 16 RNW PP Auto: MS vs. U.S., 2005-2013 Source: NAIC, Insurance Information Institute Average 2005-2014 US: 6.2% MS: 3.6% Mississippi’s PP Auto RNW topped the US overall in most years of the last decade

17. 17 RNW Commercial Auto: MS vs. U.S., 2005-2014 Source: NAIC, Insurance Information Institute Average 2005-2014 US: 6.9% MS: 4.9%

18. 18 RNW Commercial Multi-Peril: MS vs. U.S., 2005-2014 Sources: NAIC, Insurance Information Institute Average 2005-2014 US: 6.4% MS: -7.5%

19. 19 RNW Homeowners: MS vs. U.S., 2005-2014 Source: NAIC, Insurance Information Institute Average 2005-2014 US: 3.8% MS: -26.8%

20. 20 RNW Workers Compensation: MS vs. U.S., 2005-2014 Source: NAIC, Insurance Information Institute Average 2005-2014 US: 6.3% MS: 7.7%

21. All Lines: 10-Year Average RNW MS & Nearby States 2004-2013 Mississippi All-Lines profitability for this decade is below its neighbors Source: NAIC, Insurance Information Institute

22. PP Auto: 10-Year Average RNW MS & Nearby States 2005-2014 Mississippi PP Auto profitability is in the middle of its neighbors Source: NAIC, Insurance Information Institute

23. Commercial Auto: 10-Year Average RNW, MS & Nearby States Sources: NAIC, Insurance Information Institute 2005-2014 Mississippi Commercial Auto profitability is in the middle of its neighbors

24. Commercial Multiple-Peril: 10-Year Average RNW, MS & Neighbors Source: NAIC, Insurance Information Institute 2005-2014 Mississippi Commercial Multi-Peril profitability is far below its regional neighbors

25. Homeowners: 10-Year Average RNW MS & Nearby States Source: NAIC, Insurance Information Institute 2005-2014 Mississippi HO profitability is below all but one of its neighbors

26. Workers Comp: 10-Year Average RNW MS & Nearby States Source: NAIC, Insurance Information Institute 2005-2014 Mississippi Workers Comp profitability is basically even with its neighbors

27. Premium Growth 12/01/09 - 9pm 27

28. 28 All Lines DWP Growth: MS vs. U.S., 2005-2014 Source: SNL Financial. (Percent) Average 2005-2014 US: 1.9% MS: 2.9%

29. 29 Commercial Lines DWP Growth: MS vs. U.S., 2005-2014 Source: SNL Financial. Average 2005-2014 US: 1.4% MS: 2.8%

30. 30 Personal Lines DWP Growth: MS vs. U.S., 2005-2014 Source: SNL Financial. Average 2005-2014 US: 2.6% MS: 3.2%

31. 31 Homeowner’s MP DWP Growth: MS vs. U.S., 2005-2014 Source: SNL Financial. Average 2005-2014 US: 4.7% MS: 5.5%

32. 32 Private Passenger Auto Growth: MS vs. U.S., 2005-2014 Source: SNL Financial. Average 2005-2014 US: 1.6% MS: 2.1%

33. Competition 12/01/09 - 9pm 33

34. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 34 Brief Background on the HH Index It is the sum of the square of the market shares of sellers It is commonly used by the Justice Department to help determine whether a merger will harm the competitive environment

35. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 35 Examples for the HH Index First, assume a market with 5 sellers, each of which has a 20% market share  Each seller would have a score of 400, and the HH Index would be 2000 Next, assume a market with 10 sellers, each of which has a 10% market share  Each seller would have a score of 100, and the HH Index would be 1000 Now assume a market with 20 sellers, each of which has a 5% market share  Each seller would have a score of 25, and the HH Index would be 500

36. LOB Competition in MS in 2014, as Indicated by the HH Index Line of Business Number of Companies HH Index PP Auto571162.5 HO481317.8 Workers Comp 99510.3 Commercial290247.8 12/01/09 - 9pm 36 Sources: NAIC, via SNL Financial; Insurance Information Institute

37. HH Index for PP Auto in Mississippi, 2014 Rank of Insurers writing PP Auto in MS Market ShareHH Index Top 563.5%1053.9 6-1020.8%91.9 11-157.6%12.1 42 others8.1%4.7 Total (57)100.0%1162.5 12/01/09 - 9pm 37

38. 38 Personal Lines Exposure Growth Analysis 12/01/09 - 9pm 38

39. Growth of PP Auto Exposures 12/01/09 - 9pm 39

40. 12/01/09 - 9pm 40 (Millions of Units) Auto/Light Truck Sales Will Likely Continue at Recent Levels Sources: US Department of Commerce; Blue Chip Economic Indicators, 3/16 issue (forecasts); Insurance Information Institute. Yearly car/light truck sales will likely continue at current levels, in part replacing cars that were held onto in 2008-12. But rising interest rates could eventually restrain demand for new vehicles. We’re back to new vehicle sales levels last seen pre-recession

41. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 41 America is Driving More Again: Total Miles Driven*, 1996–2016 *Moving 12-month total. The data are through January 2016, the latest available. Note: Recessions indicated by gray shaded columns. Sources: Federal Highway Administration (http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute.http://www.fhwa.dot.gov/policyinformation/travel_monitoring/tvt.cfm Billions From November 2007 until January 2015, miles driven was below the prior peak for 87 straight months— over 7 years! Previous record was in the early 1980s (39 months). New miles driven records in 2015 From 1996 (and well before), miles driven rose virtually every month, even through recessions.

42. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 42 More People Working and Driving => More Collisions, 2006–2015 Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Rolling Four-Qtr Avg. Frequency from Insurance Services Office; Insurance Institute for Highway Safety; Insurance Information Institute. Number Employed, Millions Overall Collision Claims Per 100 Insured Vehicles When people are out of work, they drive less. When they get jobs, they drive to work, helping drive claim frequency higher. Recession

43. Growth of Homeowners/Renters Exposures 12/01/09 - 9pm 43

44. 12/01/09 - 9pm 44 (Millions of Units) Forecast: Continued Growth in Private Housing Unit Starts, 1995-2019F Sources: US Department of Commerce (history); Blue Chip Economic Indicators (3/2016), forecasts; Insurance Information Institute. Housing starts are climbing slowly. Recently, the fastest growth is in multi- unit residences. Personal lines exposure will grow, and commercial insurers with Workers Comp, Construction risk exposure and Surety also benefit. Housing unit starts plunged 72% from 2005- 2009, down 1.49 million, to lowest level since records began in 1959 Rising mortgage rates could dampen the demand for new residential construction

45. Giant Age Cohort (Millenials) Is Approaching Home-Buying Stage 45

46. Growth in Number of Households => Increased Demand for Housing 46

47. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 47 Number of Owner-Occupied & Renter-Occupied Housing Units, US, Quarterly, 1990:Q1-2015:Q4 Sources: US Census Bureau at http://www.census.gov/housing/hvs/data/histtabs.html, Table 8; Insurance Information Institute. http://www.census.gov/housing/hvs/data/histtabs.html Since 2004 the number of renter-occupied housing units has grown by over 10 million units (+31.5%), but there has been no growth in the number of owner- occupied housing units in nearly 10 years. When will this end? 12/01/09 - 9pm 47 Millions of Owner- Occupied Housing Units Number of owner-occupied units has been stuck at roughly 75 million units since 2005:Q4 Millions of Renter- Occupied Housing Units Trough in 2004:Q2 at 32.61 million units. Latest renter-occupied was 42.58 million units in 2015:Q4.

48. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 48 I.I.I. Poll: Renters Insurance Source: Insurance Information Institute Annual Pulse Survey. Percentage of Renters Who Have Renters Insurance, 2011-2015 Percentage Of Renters With Renters Insurance Continues to Increase.

49. 49 Catastrophes & U.S. Insured Catastrophe Losses 12/01/09 - 9pm 49

50. 12/01/09 - 9pm 50 Tornadoes, Hail, and Wind Events in Mississippi, 2015 Sources: http://www.spc.noaa.gov/climo/online/monthly/states.php?month=00&year=2000&state=MS ; Insurance Information Institute.http://www.spc.noaa.gov/climo/online/monthly/states.php?month=00&year=2000&state=MS

51. 12/01/09 - 9pm 51 Number of Tornadoes in Mississippi, Yearly, 2000-2015 Sources: http://www.spc.noaa.gov/climo/online/monthly/states.php?month=00&year=2000&state=MS ; Insurance Information Institute.http://www.spc.noaa.gov/climo/online/monthly/states.php?month=00&year=2000&state=MS Is the number of tornadoes that strike Mississippi each year increasing? Based on the last 16 years—and especially the last 8—it certainly seems so. Avg., 2000-2007: 49.0 Avg., 2008-2015: 85.8

52. 12/01/09 - 9pm 52 Number of High Wind Events in Mississippi, Yearly, 2000-2015 Sources: http://www.spc.noaa.gov/climo/online/monthly/states.php?month=00&year=2000&state=MS ; Insurance Information Institute.http://www.spc.noaa.gov/climo/online/monthly/states.php?month=00&year=2000&state=MS Is the number of high wind events that strike Mississippi each year increasing? Based on the last 16 years, it certainly doesn’t seem so. Avg., 2000-2007: 450 Avg., 2008-2015: 528

53. P/C Industry Homeowners Claim Frequency, Mississippi, 1997-2013 Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p.72; Insurance Information Institute Claims Paid per 100 Exposures

54. P/C Industry HO Average Claim Severity, Mississippi, 1997-2013 Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” 2015 edition, p. 72; BLS inflation calculator, with Insurance Information Institute calculations Current dollars

55. P/C Industry HO Average Claim Severity, Inflation-adjusted, Mississippi, 1997-2013 Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” 2015 edition, p. 72; BLS inflation calculator, with Insurance Information Institute calculations Constant dollars Non-CAT inflation- adjusted claim severity tripled in the 17 years 1997-2013

56. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 56 U.S. Insured Catastrophe Losses *Through 12/31/14. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute. 2013/14 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster Losses in US History. Longer-term Trend is for more—not fewer—Costly Events 2012 was the 3 rd most expensive year ever for insured CAT losses $15.5 billion in insured CAT losses in 2014 ($ Billions, $ 2013) 12/01/09 - 9pm 56

57. 12/01/09 - 9pm 57 Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2013* *2010s represent 2010-2013. Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers. Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute. The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades Avg. CAT Loss Component of the Combined Ratio by Decade 1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 6.1E* Combined Ratio Points Catastrophe losses as a share of all losses reached a record high in 2012

58. 12/01/09 - 9pm 58 Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1994–2013 1 1.Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2013 dollars. 2.Excludes snow. 3.Does not include NFIP flood losses 4.Includes wildland fires 5.Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation. Source: ISO’s Property Claim Services Unit. Hurricanes & Tropical Storms, $159.1 Fires (4), $5.5 Events Involving Tornadoes (2), $139.3 Winter Storms, $24.7 Terrorism, $24.8 Geological Events, $18.4 Wind/Hail/Flood (3), $14.6 Other (5), $0.2 Wind losses are by far cause the most catastrophe losses, even if hurricanes/TS are excluded. Tornado share of CAT losses is rising Insured cat losses from 1993-2012 totaled $386.7B, an average of $19.3B per year or $1.6B per month Winter storm losses were much above average in 2014/15 and will push this share up

59. Loss events in the US, 1980 – 2014 Number of events 59 Meteorological events (Tropical storm, extratropical storm, convective storm, local storm) Hydrological events (Flood, mass movement) Climatological events (Extreme temperature, drought, forest fire) Geophysical events (Earthquake, tsunami, volcanic activity) Number of Events 7 72 24 16 2014 Total: 119 Events Source: Geo Risks Research, NatCatSERVICE The number of loss events surged from 2006 – 2010, though insured losses remained elevated through 2012

60. Loss Events in the US, 1980 – 2014 Overall and insured losses 60 Overall losses (in 2013 values)* Insured losses (in 2013 values)* *Losses adjusted to inflation based on CPI. Overall losses totaled US$ 25bn; Insured losses totaled US$ 15.3bn Source: Property Claim Services, MR NatCatSERVICE. $ Billions

61. Investments: The Grim Reality 61 Investment Performance is a Key Driver of Profitability Depressed Yields Will Necessarily Affect Underwriting & Pricing 12/01/09 - 9pm 61

62. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 62 US Treasury Note 10-Year Yields: A Long Downward Trend, 2000–2016* *Monthly, constant maturity, nominal rates. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm; National Bureau of Economic Research (recession dates); Insurance Information Institute.http://www.federalreserve.gov/releases/h15/data.htm Yields on 10-Year US Treasury Notes have been below 3% for 4½ years Since roughly 80% of P/C bond/cash investments are in 5-to-10-year durations, most P/C insurer portfolios will have low-yielding bonds for years to come. US Treasury yields plunged to historic lows in 2013, then rebounded and sank again 12/01/09 - 9pm 62

63. 12/01/09 - 9pm 63 P/C Insurer Portfolio Yields, 2002-2015:Q3 Sources: NAIC, via SNL Financial; Insurance Information Institute. P/C carrier yields have been falling for over a decade, reflecting the long downtrend in prevailing interest rates. Even as prevailing rates rise in the next few years, portfolio yields are unlikely to rise quickly, since low yields of recent years are “baked in” to future returns.

64. 12/01/09 - 9pm 64 Forecasts of Avg. Yield of 10-Year US Treasury Notes All forecasts expect US intermediate- and long-term interest rates to rise over the next three years and stabilize about 2019. Sources: Blue Chip Economic Indicators, March 2016 issue; I.I.I. Top 10 Avg.: 3.6% Bot 10 Avg.: 2.2% Top 10 Avg.: 4.2% Bot 10 Avg.: 2.6% Top 10 Avg.: 4.4% Bot 10 Avg.: 2.8% Top 10 Avg.: 4.5% Bot 10 Avg.: 3.0% Top 10 Avg.: 4.5% Bot 10 Avg.: 3.2% Top 10 Avg.: 2.5% Bot 10 Avg.: 1.9%

65. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 65 Inflation Expectations, 5 Years Ahead* from the Bond Market *Monthly, yields on US Treasury 5-Year Notes minus yields on 5-Year TIPS, through Nov. 2015. **CPI less food and energy. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.http://www.federalreserve.gov/releases/h15/data.htm Since roughly 80% of P/C bond/cash investments are in 5-to10-year durations, most P/C insurer portfolios will have low-yielding bonds for years to come. 12/01/09 - 9pm 65

66. 12/01/09 - 9pm 66 P/C Insurers Below-Investment-Grade (BIG) Bonds as a Percent of Total Bonds, 2001-2015:Q3 Sources: NAIC, via SNL Financial; Insurance Information Institute. As a group, P/C carriers have increased the percentage of bond investments in riskier instruments. Since 2006-07, that percentage has risen over 200 basis points (double what it was). As interest rates rise, will this percentage return to pre-recession levels?

67. 12/01/09 - 9pm 67 P/C Insurer Groups Holdings of BIG** Bonds as a Percent of Total Bonds, 2014 *Below Investment Grade Sources: NAIC, via SNL Financial; Insurance Information Institute. There is a wide disparity among insurance groups regarding holdings of below-investment-grade bonds. Some hold none (or almost none); a few have over 10% of their bond portfolio in BIGs. Number of Groups The 67 groups graphed are those with over $3 billion in cash & admitted assets as of year-end P/C industry average

68. 12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 68 Other Things That Could Affect the Course of Interest Rates Prices of world currencies (the value of the US Dollar vs. the Euro, the Yen, the Yuan and other major world currencies) Prices of a number of commodities (especially oil) Prevailing interest rates in other countries (determined, in part, by those countries’ central banks) The demand for, and the supply of, loanable funds

69. Property/Casualty Insurance Industry Investment Income: 2000–2014 1 Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014. 1 Investment gains consist primarily of interest and stock dividends. *2014 figure is estimated based on annualized data through Q3. Sources: ISO; Insurance Information Institute. ($ Billions) Investment earnings are still below their 2007 pre-crisis peak

70. Property/Casualty Insurance Industry Investment Gain: 1994–2014 1 Total Investment Gains Were Down Slightly in 2014 as Low Interest Rates Pressured Investment Income but Realized Capital Gains Remained Robust 1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. * 2005 figure includes special one-time dividend of $3.2B; Sources: ISO; Insurance Information Institute. ($ Billions) Investment gains in 2014 will rival the post-crisis high reached in 2013

71. www.iii.org Thank you for your time and your attention! Insurance Information Institute Online: 12/01/09 - 9pm 71